Honda Motor Co., Ltd. (NYSE:HMC) Q1 2024 Earnings Call Transcript

Honda Motor Co., Ltd. (NYSE:HMC) Q1 2024 Earnings Call Transcript August 10, 2023

Unidentified Company Representative: Thank you very much for coming despite your busy schedule today. We would like to now start Honda Motors Company Limited’s briefings on FY 2024 Q1 Financial Results. We have interpretation service, for the non-Japanese investors and analysts. Thank you for your understanding. First of all, let me introduce today’s speakers. We have Eiji Fujimura, Executive Officer and CFO.

Eiji Fujimura: I’m Fujimura.

Unidentified Company Representative: We have Masao Kawaguchi, Operating Executive, Head of Accounting and Finance Supervisor Unit.

Masao Kawaguchi: I’m Kawaguchi. Thank you very much for today.

Unidentified Company Representative: Finally I am [Diva] from IR department, and I will be facilitating today’s meeting. So without further ado, I would like to have Fujimura to provide a summary on the 2024, Q1 financial results followed by the details of the earnings by Kawaguchi. Over to you.

Q&A Session

Eiji Fujimura: Thank you very much for taking the time out of your busy schedule today. I would like to review the results from the first quarter of fiscal 2024. First, I would like to touch on the highlights of the results. In Q1 FY24, with the improved fixed cost structure that we have been optimizing, we maximized the effect of increased sales unit, mainly in North America, and achieved the significant growth in automobile operating profit year-on-year. With respect to the total profit, operating profit grew ¥172.2 billion year-on-year to ¥394.4 billion a quarterly record with operating margin at 8.5% the fiscal year 2024 forecast is kept unchanged. Today, at the board, a resolution was adopted approving a stock split. I will now turn to the automobile business results in the main markets.

The overall results from the first quarter fiscal 2024 exceeded the same period previous year. In the United States, the improved supply of semiconductors and recovery in production. In addition to strong sales of models introduced last year that result substantially surpassing the Q1 of last year. On the other hand, in China, expansion of new energy vehicle market resulting in more intense competition impacted the results, which were lower year-on-year. We maintain the previous forecast for fiscal 2024. In regard to our electrification efforts, in order to develop the next generation competitive software defined mobility products and services. We reached basic agreement on partnership with SCSK Corporation. In North America, seven automaker, including Honda, concluded agreement to establish a joint venture to create a high powered charging network for EV.

Next, turning to the motorcycle business. Number of units sold was lower in India and Vietnam year-on-year. But in Indonesia, in comparison to last year, when we were impacted by semiconductor supply issues, production has become stable and sales results significantly outpaced the same period last year. Overall, results exceeded the same period last year. Forecast for FY ’24 remains unchanged. As regards electrification efforts, we announced this month the launch of the personal use electric motor cycle, EM1e, which is the first of its kind for Honda in Japan. Next, I will go over the consolidated results from Q1, FY ’24. As I highlighted earlier, operating profit rose a ¥172.2 billion year-on-year to ¥394.4 billion. Profit for the period attributable to owners of the parent increased ¥213.8 billion to ¥363 billion.

Next, I will discuss the stock split and dividends. At the Board today, a resolution was adopted approving a stock split by reducing the company’s stock price per investment unit. We aim to establish an environment where it is easier to invest in our company for the purpose of expanding the investor base, each share of common stock will be split into three shares per share. Annual dividend forecast for fiscal 24 remains unchanged three stock split basis. The dividend forecast calculated based on the number of shares after the split is as shown here. Next, I will turn the microphone over to Kawaguchi who will give the details of the earnings result from Q1, fiscal ’24.

Masao Kawaguchi: Let me explain. First, Honda Group’s unit sales for Q1, FY 2024 were 4.47 million units in the motorcycle – business, mainly due to higher sales in Asia compared to the same period last year. Sales in automobile business were 101,000 units, mainly due to an increase in sales in North America. Sales in the power products business were 983,000 units, primarily due to lower sales in North America. Next is on the changes in profit before income taxes in Q1 compared to the same period last year. First of all, operating profit increased by ¥172.2 billion year-on-year. Let me walk through the factors. Impact from sales was plus ¥133.7 million as a result of higher sales units of both automobile and motorcycle. With regards to the impact from price and cost, the increase was ¥65.9 billion, as a result of lower raw material prices, especially for precious metals, and the effect of pricing commensurate with the improvement in product value With regards to expenses, while quality related expenses decreased, as a result of higher advertisement cost and labor cost, The impact was negative ¥29.8 billion.

R&D was minus ¥20.8 billion currency effects was positive at ¥23.2 billion. In addition to higher operating profit and unrealized gains from foreign currency bonds, pretax profit was plus ¥277.5 billion. Next on the sales revenue and operating profit by business segment. Operating profit for the motorcycle business was ¥143.5 billion. For automotive bill business, ¥176.9 billion, ¥69.5 billion for financial services, and ¥4.4 billion for power products and other businesses. Next is on the cash flows. Cash flows in the three months of Q1, FY ’24, were ¥285.6 billion. Net cash at the end of Q1 was ¥2 trillion and ¥984.1 billion that is all for the explanation. Thank you very much for your attention. Thank you for your kind attention.

A – Unidentified Company Representative: [Operator Instructions] First question from Citigroup Securities, [indiscernible] please. Please turn on your video and microphone.

Unidentified Analyst: Thank you for taking my question. First question, results were quite strong. Operating profit how do you, how much was it better in comparison to internal forecast? However, you have kept, FY ’24 forecast, for the year unchanged. What is the background? That is the first question. The second question is about China. When we look at the numbers, it seems that in terms of unit sales, you are struggling, what is the latest status, including, price competition and what is the risk in terms of a unit sales for this term. And, what is the impact, based on equity method profit?

Eiji Fujimura: Thank you, Mr. Yoshida, for your questions. First of all, as you rightly mentioned, we have kept full year forecast unchanged. And Q1 quarter results, we wanted to convey the Q1 results today. And regarding upside and downside, we, would like to comment on upsides and downsides for your better understanding. As for how we look up, the first quarter results before, discussing, profitability about unit sales in automobile business. 90,000 in comparison to the same period of last year, profit is maximized in North America increase was by a 130,000 units. Annual plan is 4.35 million and the progress is 21%. It is, somewhat at a lower level, but we believe this was more or less on targets. To begin with regarding China, in the beginning of the fiscal year, we mentioned in our announcement that, there was a 6b pollution standard, resulting in a discount competition and there is also increase in market share in net market, and we expected that, it will be a difficult market.

In that sense, regarding unit sales, China was as we expected. As for semiconductor supply shortage last year, because of the shortage, we struggled significantly. But we have a production plan one week, two week ahead of time, which was suddenly changed last year. But this year in January, especially after January, the situation, continued. However, in April to June, we no longer experienced such difficult situation, but we cannot become too optimistic regarding China. So, I will come back to China later as for motorcycle business in the first quarter unit sales was slightly below our expectations. That is the reality. In comparison to last year, group sales increased by 200,000. However, on a consolidated basis, unit sales declined by a 100,000.

India in the other hand, so larger decline as for India, from April this year environmental regulations have to be complied to. And for that purpose, we are introducing new components. And for these new components, we were somewhat impacted by semiconductor supply issues, and it was about, 50,000 down from the previous year. However, we expect to recover in the second half of the year, and we believe that we will be able to – achieve unit sales in India as for Vietnam, you are familiar with the situation. Economy is slowing down. There are signs of slowing of the economy. And to maximize our profit, we are also focused on Vietnam, and therefore, this is a cause for concern. However, regarding Vietnam. And however, as opposed to a Vietnam in Thailand and in Europe and the United States, sales unit is increasing.

So, we would like to, offset the decline in Thailand. As for profitability, as you mentioned, operating profit, annual target is ¥1 trillion. And, it is, about a 40% – as progress at ¥390 billion regarding motorcycle, ROS is 19%. And as I mentioned earlier, in Vietnam, we are struggling a bit. However, we were able to report a rather strong results. As for automobile business, we have always been saying that we are focusing on fixed cost reduction and, we are also introducing new models. We now have more or less all of the new models after civic and we are increasing profitability with these new models. And, we have been able to improve, COGS ratio and unit sales increase. Additionally – enabled us to maximize the effect of increase in unit sales.

However, in quarter Q1, quality related expense was only 0.6% of operating profit. There are also some changes in – lagging, lag from the fund and ROS for automobile is 5.8%. This is not, really analyze the number, but gross profits was at driven by, strong unit sales, which we assess positively. As for three months ¥30 billion was our expectation, but it is at 39 billion up rather ¥390 billion, rather than ¥300 billion which is up $90 billion and half is, because of currency effect and half is because of the delay in delivery, et cetera. And so for profit and for sales units, we are achieving the plan more or less online as for full year forecast maintained unchanged. Well, there are, China and Vietnam situation, but in areas other than currency effect, on a real basis.

We have the target of ¥1 trillion and we would like to make sure that that is achieved. And in the beginning of the fiscal year, we felt that it is, too premature to change full year forecast and that is why forecast remains unchanged. So that is my response to the first question. Turning to the situation in China, in the beginning of the year, 1.4 million was the plan, and this plan is also kept unchanged. On this point, as I mentioned earlier, we expected for the first quarter to be somewhat weaker. And from the second quarter onwards our port and Breeze inspire CRV. With these models, new models have been launched. And, we want to make sure that, with these new models, sales is, expanded. But we believe that we will have to focus significantly.

We have to spend a much effort. That is how we view the situation. In coastal cities, some of the cities, And in inland cities where we were not traditionally as strong, we will also have to reinforce our sales capabilities and in Chinese headquarters, with the partners to achieve the target, efforts are being made. But a recent trend, is such that in July, the, combining the results, including our joint venture, at the retail level, unit sales is about 80,000 to 90,000. And, we are also dependent on our partner’s business. And currently, I’m not able to, discuss on the exact number of units, but, the decline in number of units. We allocate components to regions, and, we will make up for that in other areas on an effective or on real basis.

We will make up for the profit and unit sales, will be, offset on a global basis. I think that will be the focus area going forward. Those are my responses to your questions.

Unidentified Analyst: Thank you very much. One supplementary question here. So in the past – you used to change your forecast on a quarterly basis, but this time, the way you present it has changed. Is that the case? And would be willing to comment on that. And the second point is that. So it’s, you have not changed your forecast of 4.35 million, but the reductions in China, will be reallocated to North America and other parts of the world. So maybe you enough demand trend you see, or maybe you have some semiconductor forecast. So maybe you’ll see some opportunities in other parts of the world other than China. Is that the case?

Eiji Fujimura: Well, with regards to the first point, so depending on the situation, what we do with this quarter the next quarter last next year. Yes, but because we’re basically in line, and whatever we have laid out at the beginning of the year is our forecast and it’s also our ambition, our targets. So if you exclude our foreign currency, we would like to make sure that we’re able to, go with our commitments. And that’s the significant things of it and also related to your latter question about 4.35 million units. And the reason why we have kept this plan unchanged is basically, as you point out. Let’s say it turns out to be difficult in China. If we make that decision, then we will offset that in other parts of the world.

And I did not talk about North America, but, actually, if you look at North America, We are producing in a very extremely, difficult environment. The supply shortage is beginning to be solved. However, we have been producing at a very low volume. And now we’re trying to lift that up. And I think last time in Q4, against the forecast, our production was not able to catch up. And so, there was a shortfall, but we need to in the stage of wrapping up for our units, and suppliers are also struggling with us together. So, we are cautious in that sense, but we – in any case, 4.35. This is our global target, which we would like to, make sure we’re able to achieve. We’d like to make that effort. So that is why we kept it unchanged. That is all from me.

Unidentified Analyst: Well, thank you very much.

Unidentified Company Representative: Thank you, Mr. Yoshida, for your questions. Next from Mizuho Securities,[indiscernible], please. I’m in at the Michael. Please turn on the video and microphone.

Unidentified Analyst: This is Isiyama from Mizuho Securities. Can you hear me?

Unidentified Company Representative: Yes. We can. Please go ahead.

Unidentified Analyst: Thank you. First question, I’m looking at Page 17 of the material, there is business-by-business, profit results. And, as for sales price, for motorcycle and automobile business. Could you comment on this? According to the earlier presentation, it seems that the price level is also more or less in line with your expectations, but results are quite, strong. So what is happening in more detail? That is the first question. And the second question motorcycle demand, generally speaking, how do you foresee the demand for motorcycle going forward for automobile 4.35 million units, is the, overall target. Although the breakdown might change, but for motorcycle business, could you elaborate on that?

Eiji Fujimura: Thank you, Mr. Isiyama for your questions. As for the sales price and costs, Mr. Kawaguchi will explain, as for motorcycle business, basically, the same applies. The target, we have to ensure the targets are achieved. And as for that, likelihood regarding India, as I mentioned earlier, there was a semiconductor shortage However, we are making sure that we are able to take responses and that we are – we have increased the visibility. As for a Vietnam situation is somewhat more difficult. However, from the beginning, and I always say this regarding motorcycle business, Asia, and Brazil. Our markets were very, very strong in terms of, sales unit and, profit. And they account for the majority of sales unit and profit.

However, these are also markets with higher volatilities. Last year, in comparison to last year, ROS, number is 19%, this quarter. But given high volatilities, we expect, further volatilities. So around 15% or so, is, the target for ROS constantly and, that is as far as profitability is concerned. And as per unit sale, we would like to make sure to achieve the target. And, regarding profitability, although Vietnam is somewhat down, we would like to make up for that in other markets such as Thailand and, Europe and North America, where, per unit, profitability is higher. And, it’s not that we have given up on Vietnam. We would also like to continue to make effort in Vietnam. On pricing cost, thank you for the question. With regards to the impact of pricing cost, if – I want to start from the company wide total.

So first of all, in Q1, if you look at the total, compared to last year, the selling price was actually positive, ¥65.9 billion. This includes material cost and different inflation and cost increases. And against that, we have pricing, based on the company efforts. So this is the net effect. And up until last year, there was a significant inflation impact and raw material cost increase. And in order to absorb that, we have tried to reflect that in the pricing. But as I said at the beginning of the year, in starting from this fiscal year, inflation is starting to come down. And if you look at the precious – metals and materials, you must be pressing as also calm down. So – whatever we have tried to respond in terms of the cost affects, this has been actually reflected in our full year basis.

So in first quarter, whatever we planned at the beginning of the year. We are beginning to see that effect, in the three months, interest of cost domain compared to Q1 year-on-year, because inflation was intermittent. If you compare to this quarter, including labor costs. There was elements of cost increase. Also, our suppliers, they have also been trying to raise cost, have seen increasing cost as well. So, we talk each one of them and tried to share the burden of the cost increase. So increasing cost compared to the, last quarter last year, we still see that, in this quarter. And in terms of material cost, because of the reductions in the production volume of automobile, we have seen reductions including PGM. And that portion compared to Q1, 2023, we are seeing the reductions in the metal prices.

So, we have seen the cost increase, but also the cost reductions in the material cost. So that’s a negative effect. So in other words, on a company basis, in terms of the pricing of the products, we’re beginning to see a full effect of it. So, if you could kind of, get that – idea from that. And in terms of a motorcycle and automobile, if you look – see the breakdown. For automobile, as we had just explained in terms of cost increase, and this has been absorbed I think, decreasing material cost and metal price costs, and we’re beginning to see positive effect on pricing. In terms of, motorcycle, the pricing is the same as automobile, but in terms of cost reduction, because of the production volume has recovered quicker in motorcycle, cost is a little bit more positive on the motorcycle side.

So ¥29.4 billion 00,000,000 in here. This includes, positive impact of selling price. And also we have a net positive effect on cost as well. So for automobile, we are also looking at how the suppliers are doing as well, but we will continue to realize cost reductions in line with the production volume. That is all from me.

Unidentified Analyst: Thank you very much. Quickly second question, first quarter was more or less in line and probably forecast is kept unchanged. So, do you think that there are opportunities for upside labor costs and regarding inflation?

Eiji Fujimura: In comparison to our expectation, we believe our costs are generally somewhat higher, but as for materials cost, they were lower than our expectations. And offsetting these, it is more or less in line from the beginning of the year, forecast. As for precious metal, this is, affected by commodity market, and we cannot foresee. But, for the moment, it is, in line with our forecast. Thank you.

Unidentified Company Representative: Isiyama, thank you. Next [indiscernible] from Bofa. Bank of America Securities, please. Could you turn your camera on and the microphone on as well?

Unidentified Analyst: This is [indiscernible]. Thank you for the opportunity to ask a question. I have two questions, please. First question, I’m a little bit persistent here, but in Q1, in particular, if you look at fixed cost for domestic and with regards to sustainability, would able to elaborate. So, basically, at the beginning, I think your question – earlier question was that this fixed cost structure is not sustainable. But if based on the numbers that we have seen, if you exclude the claim fees, I think you have increase of cost of about ¥25 billion year-on-year. Meanwhile, if you look at a geography, profitability in Japan is 8.9%. This is unprecedented margin, and this seems as though this too good to be true. Meanwhile, you have undertaken different initiatives, and I think this is the effect.

And I hope that this effect will continue. So, as we have some hopes in your ability to sustain this. So would you be able comment on sustainability. So this is my first question. The second question is on the free cash flows and how you think about it. If you could update us on your way of thinking in Q1, if you exclude financial services, it was a positive of ¥290 billion. Meanwhile, if you look at the balance sheet, there’s a foreign exchange impact, but you still have a high level of inventories. So if, let’s say, as you have been saying from before, production recovers and you have increasing unit productions that maybe you will see reductions in the internal inventory. So this year’s free cash flow could be at a very significant level.

So if you have any target, numerical target, or ballpark figure would be able to look at, please share that with us? So that’s why second question. Thank you.

Eiji Fujimura: Thank you very much. So with regards to domestic Japan, every time. I know that this is a little bit difficult to understand because it’s by site by – and we submit this number by segment. So as you know, very well, So that we have the business we produce in Japan and selling Japan. We have business where we do knock down export from Japan, and then we have R&D, and we have business where we’re able to collect on a loyalty basis. So there are three different types of businesses which exist, and we’re trying to present this altogether. So that is why it’s very difficult to understand. In Japan, the fixed cost reductions benefit that’s being realized here in Japan. This is more or less, this is the impact on the increasing loyalty from overseas and also foreign exchange.

And, I think those have – comprise a very large portion. With regards to the reductions in fixed cost, in North America, Europe, and Asia. We have implemented different measures to do that. And, of course, we are also, trying to improve our debt situation in Japan as well, but I think the growth this comes from mostly from foreign exchange and loyalty royalties. I think those are the two large effects. With regards to free cash flows. It’s true ¥290 billion that’s right. This was the case last year, but there’s about ¥700 billion or so on an annual free cash flows. So with regards to this year, we’re eyeing at this about that same level. So as I have said, profit is about 40% right now. And also in terms of investment, it will be and of course, we happen to invest taking equity stakes in companies, but investment, is more leaning toward the second half of the year.

So between ¥600 billion to ¥700 billion in free cash flows, we should be able to generate for this full year, that’s our plan. And with regards to the inventory this is compared to our peers, our inventory management against sales, revenue, tends itself. It tends to be, a little bit, on the larger side, because we’re trying to supplement on a global basis, but reversely put. We have some challenges on the distribution logistics side. So I have mentioned before that we would like to, entrust this to okay, but as you point out, this is an area where we would like to improve. We do have foreign change impact, but inventory is of that situation. So it is slightly high. We do agree with you. Hope that answers your question.

Unidentified Analyst: Thank you very much. So, for each point, first the question So in Japan, it is, lacking behind, in terms of when it is accounted for, in this current fiscal year or the next, quarter. But what is the situation? And as for towards the end of the fiscal year, inventory will, decline and the free cash flow. Of course, there may be more investment but, declining inventory will contribute to free cash flow?

Eiji Fujimura: As for the first question, the answer is yes. Your understanding is correct as for inventory, naturally. If, our products are sold, inventory should, come down. And right now, production as soon as we produce a car, it is sold, especially in North America. So I believe, the inventory level at the current level, may continue where it is a slightly higher, it may come down, contributing to free cash flow. But, overall, what we envision is around ¥700 billion in free cash flow.

Unidentified Analyst: Thank you very much.

Unidentified Company Representative: Thank you. Next from Daiwa Securities. [indiscernible], please. Please turn on your video and microphone.

Unidentified Analyst: Hello. I’m Hakomori from Daiwa Securities. Thank you for taking my questions. I have two questions. First, according to the presentation material, Page 17, detailed, breakdown of increase in decrease are given for both motorcycle business and automobile business as for the unit for automobile, the sales unit, it is a ¥130 billion and – I understand that, there was an increase of a 130,000 in the, in North America, where there’s a higher profitability. But in an event, increasing profit is very large. So could you comment on this? And, the as for the operating profit ratio of automobile, it was mentioned that it is not sustainable, but the, 5.8%, is in comparison to the competitors is not, especially high.

And with the unit sales recovery, could you comment on the mechanism where you do not expect a much recovery in operating profit margin. And, the question is a very simple question in the United States. What is the, latest in terms of, your demand forecast for North America – for the United States?

Eiji Fujimura: Thank you. Hakomori san for your questions. As for the breakdown, I would like to ask Kawaguchi san to discuss later. In comparison to a unit, it might appear larger. Profitability by model and cost reduction efforts have been, providing a positive impact. Marginal, profit that per unit, although this is not disclosed in North America, in comparison to when I was in the U.S. three years ago, it has increased substantially. There is also an impact from currency effect to the positive side, but very high level is realized Accord CRV pilot, are the, new models that were added and I see strong positive impacts from these models. As for 5. 8% in comparison to the peers, it is not necessarily high, and that is true.

But in any event, ROS of 7% or above by 2025, these our target. And in, the pursuit of such target for automobile business. It is not 7% or more with the help from motorcycle, it is 7%. So it may be around 5% to 5.5% in automobile for ROS. And steadily, 5.8% of whether it is sustainable or not, I’m only looking at this year. And I mentioned that it may not be sustainable, but, we would like to make sure to raise ROS and in what ways can we increase ROS by region or globally. We have production capacity of 5.14 million, but we producing only about 4 million also. So, we should increase our production and, price per unit. We will continue to examine the unit price. We have been making efforts to reduce cost. If we also have been supporting our suppliers.

And after a COVID pandemic, unit number declined and there were also some issues with our operations. Based on the premise that we have sufficient semiconductor, we have production plants. However, because of a shortage of supply, we have to stop in some places, and we have, of course, the inconveniences to some of our suppliers. We have to stabilize the production and, we have to, make sure that we do that. There is no magic wand, because we’re dealing with production. We have to steadily improve the production and thereby achieve the target. As for the, U.S., business before that, could you give the breakdown?

Masao Kawaguchi: Thank you for the question with regards to automobile. Truck sales is not much trick to it as Fujimura said at the beginning. Last year, we invested highly profitable sort of architecture effect in our models, so highly profitable models we have launched, and that is why we have seen an increase of 125,000 units excuse me. And meanwhile, in Asia, especially in India, we have seen slowdown in units. And on the average basis, we need I think it has helped increase the unit price for automobile. And in North America, the fact that the production volume we are seeing beginning to ramp up on a supplier basis, there are some that it will be included in consolidated basis so there’s improvement in profitability there as well. So there’s a little bit of that, but I would say the majority is contributed from the North American increasing units. So that is all from me.

Eiji Fujimura: Thank you. And that’s a situation in North America. So Q1, as we have described, sales are solid demand is good. Civic, HRV, CRV, Pilot, Accord. All of these, model cycles have been leveraged, and I think we been able to make a good use of that. In terms of dealer’s inventory at the end of last fiscal year, so end of March, we had 60,000 in big dealer inventory. While we are increasing production, our inventory level is only 62,000 so that’s only an addition of 2,000 units. So that’s why wholesale, you know, production and sales. I mean, this is all continuing in a good cycle. So as I have been saying, we would like to work with the suppliers to, focus on ramp up. And there will be some challenges, of course, but we would like to make sure that we’re able to wrap up our production in North America.

So we’re working on that. And for this fiscal year, there may be some concerns of, recessions and maybe in terms of the used car market impact. There is a little bit of uncertainties, maybe within terms of certainties, but maybe on the recession side, we’re starting to see some anticipation of that. So, we would like to, maximize our sales opportunity and in order to leverage that we need to make sure that we’re able to, complete our production plan. With regards to finance, financial services, so there was a time, where we had reduced incentives, and that’s why the penetration was less than 50%. And also, you know, U.S. Honda units were slow. So financial, receivables have decreased, but finally, penetration has recovered to more than 60%.

And as a result of that, in terms of the reductions in receivables has hit bottom in terms. We look at, KPI, of an ROA in order to operate our financial services. So in terms of, operating profit, it’s somewhat inevitable that there’s a little bit of decline here, but we have hit the bottom. So even compared to last year, receivable is low. And so, there’s reductions on the profit side, but that’s the situation with the gross profit. Now in terms of used car, and if you were looking at Anaheim Index as well, we see some result there. But against that, residual contract amount, there’s about $4000 per unit on average. We’re still on the gains. There’s gain cut, from there. So, I don’t think it will turn into losses right away. And even if it does turning to losses.

You can say that this is heading towards normalization. Also, in terms of residue of value, the fact that it is on, gain sign, validation gains side, it means that we are not able to return, the cars are not returned to us. Before COVID, it was, like, 60,000 that was returned, and we were able to auction it and that was a residual losses. But that’s only about – 200 units right now. So, there will be negative impact on the used car side, but it’s not that we will be impacted by that immediately, at least not so much. So with regards to charge-offs. We are now beginning to see this come back to pre-COVID situation. And during the days of Mr. Trump and onward, there was, support, for the households during COVID. So there is hardly any charge-off credit losses at the time.

But – now they can go back to the pre COVID. So there’s about 0.6% in terms of, credit loss allowance rate, but this is, on a normalized basis. I think we’re going back to the normal station. So in the United States, the finance basis, we will manage ROA based on pricing. So, we do not have any large concerns over financial services at this point in time. I hope that answers your question.

Unidentified Analyst: Yes. Thank you for that very thorough detailed response.

Unidentified Company Representative: Thank you. Next from Goldman Sachs, [indiscernible] please.

Unidentified Analyst: This is Yousawa from Goldman. Thank you for taking my question. I have two questions. First, appropriate evaluation. You have, announced a buyback and you have also announced a stock split this time. And, I believe you will continue with these actions, but, what are other measures and actions that you plan to take going forward. And at the same time, you had these results this time, but how do you plan to change the structure of the group companies? What are your thoughts? And second question, about China, you’ve mentioned that, you need to make much efforts. Could you comment in more detail? EV market, it is very difficult. And at the, price level, it seems difficult to, improve the situation in China. So what are plans, for the countermeasures in China?

Eiji Fujimura: Thank you, Mr. Yousawa for your questions. First, about, buyback as we have been stating from the beginning of the year. Inclusive of future free cash flow. And net cash is ¥2.9 trillion about 2.3 months, worth and there is an accumulation of cash. And equity ratio is about 46% in terms of capital policy. And in anticipation of a major transformative time in the future. We also have to be mindful of our ability to invest, but we have to be, reviewing our capital policy. And as for PBR, there’s much talk about PBR these days. But even before this, became a hot topic, we have been conscious of this issue, and we have been making efforts to improve. As for the measures going forward, it is difficult to comment specifically.

As for a dividend, we would like to ensure that we will continue to have a payout ratio of 30% as for acquisition of our own shares, buyback we would like to look at the situation and be even more, timely. As for stock split, we have been considering this for quite some time. Of course, others are also, taking measures recently. And I do not know whether the numbers that I have at hand are correct. I apologize if I’m mistaken, but there’s a ¥2,000 trillion of individual assets and about ¥1,000 trillion is in bank deposits, close to a market capitalization of a total TSC are parked in bank deposits and government is encouraging, investments, including in Nissan. 8% is the percentage of, individual investors out of our investor base or shareholder base.

We would like to see more, individual shareholders and through holding of our shares. We hope that, individuals will support Honda and will take greater interest in Honda’s business. We hope that, that will be the case. And, that is why we have decided to implement the stock split this time. And it should be done at such a time as when the stock price is rising. And since it is currently rising. And, right before a new NISA program is introduced the next fiscal year, we were able to implement this. Unfortunately, and the stock split by itself is not sufficient. We would also like to enhance investor relations for individual investors, retail investors. We would like to stay young as a company, and we would also like to make a young investors interested in our company.

So we would like to make it towards that end as per reorganization of Yachiyo, and as for the structure of group companies in electrification. Because of electrification, what components, what technologies will become core technologies. We have to be able to identify that as we consider the structure as group. What company — what to do going forward? I’m not able to comment naturally, but the basic is the technology. And what will happen given the electrification going forward. However, if we combine and consolidate, as was the case with Yachiyo, we believe that we are able to improve our enterprise value. And mothers, supported us. And so, we would like to pursue a win-win solution for our structural reform. As per improving the situation in China, I think there are about 3 things.

over time, short term measures. Right now we are trying to establish a new factory with two joint venture companies targeting 2024. And if the current, 1.4 million is difficult, we have to think about a fixed cost, those will be short term measures, short to medium term measures. And going forward, regarding EV, we will focusing on EV and we would like to launch attractive products. And as we have been saying in fiscal 2025, the 3rd phase of 4th phase EVs will be introduced. And by fiscal 2028, we will have 10 models of EV in our lineup. Whether this is speedily enough, we may have to review that once again. And as I mentioned earlier, we are doing this through our joint venture business. And our intentions will have to be discussed thoroughly with our joint venture partners to reach a conclusion of what we should be achieving.

And therefore, at this point in time, I would like to refrain from commenting specifically on what we will be doing, but I believe there is a shared understanding of the issues amongst our joint venture partners. So through discussion with our partners, we would like to decide the measures over short, medium to long term And, we will be implementing those measures. I apologize that I cannot discuss in concrete terms, but that is what I meant in terms of improving China.

Unidentified Company Representative: Thank you for the explanation. Mr. Gisawa, thank you. I need to apologize. But next question will be the last question. [Mr. Nurase] from Okasan Securities. Over to you.

Unidentified Analyst: Thank you. I’m [Nurase] from Okasan Securities. Can you hear me?

Eiji Fujimura: Yes, we can hear you.

Unidentified Analyst: Thank you. I just have one last question. About your battery strategy, if you could explain once again, not to give an example from other companies, but Toyota has made different announcements about battery. And there’s some OEMs that have made and announced about Yen investment. So you are starting up a business on battery with a GS Yuasa. So what sort of battery are you planning to develop? I know you have all solid state, but what is the situation today? And also, overseas, you are now tying up with LG. But domestically, who’s going to produce the batteries? So you have announced on the development, but what about production, including sourcing raw materials. So I know this is going to be a right topic, but if you could give us a progress update on battery?

Eiji Fujimura: Thank you, Mr. Nurase. With regards to battery, in April 2026. I’m sorry. April 26, excuse me. we have made announcement about technology strategy. So I think you have looked at that and your question is based on that. But basically, in terms of the nature of the batteries, it should be producing soon locally. So our main markets or electric vehicle in Marcus Way, the developments of EV will be fast. So that would be probably most likely in North America and China. So in China, we would purchase from CDATL. That’s how we would source in China. as we it was mentioned earlier. And there’s some challenges in terms of speediness, and we have some other challenges as well, but that’s where we are. With regards to North America, this year, finally, we have been able to — we have been developing a model, EV model, electrified model, which we have co-developed with GM, and that would be launched finally.

But in this way, we will be able to source from GM in terms of vehicle. But we also have a joint venture production with LG, which we established in Ohio. So we will produce there and we will install that on our vehicles. So those what we have in mind with regards to GS Yuasa, This is a company that developed battery, but we are also thinking about manufacturing development. So we were looking at the manufacturing method, development, and this is more or less looking up from the raw material stage to recycling. So this is all a resource circulation. We’re looking at to see whether we can do some circular activity like the with GS Yuasa. So that’s what we have, published already, and we started activity already. So that’s manufacturing and development of battery.

But ahead of that, we will be producing battery as well with GS Yuasa. And also, a Blue Energy, the company that we have been working together, and Honda. So this is a three party structure for production. And this is something that we are discussing in Japan. So that’s the situation. Hope that answers your question. Thank you.

Unidentified Analyst: So I understand the direction. Meanwhile, what about battery performance? Are you going to look for something that’s innovative, or is it something to be considered on all solid state batteries maybe for this initiative, this is more on the recycling, more sustainable and more practical basis. So what is the type of batteries, which you plan to sort of segment or break it down? So could give us some your thoughts on that?

Eiji Fujimura: So in principle, the mainstream is lithium, but — liquid lithium-ion, but — and of course, we’re looking at that. But if you look at the technology trend, I think it’s risky to just focus on one direction. So in terms of pattern, but for semi solid state we work with GM, and as for all solid state, we have seen a pretty good result in lab basis, and we are trying to produce production pilot line. Build a production pilot line. And I think the key will be the manufacturing method in terms of all solid state. So we’re aiming for a breakthrough there. So that is why in the latter half of 2020 — So 2025 to 2029, that’s we’re looking at commercialization. So we need to pursue, basically different strategy, different technologies at the same time. So that’s how we proceed with it. Thank you very much.

Unidentified Company Representative: Thank you for your questions. Thank you, Mr. Naruse. With this, we would like to bring to close financial results meeting for Q1 fiscal 2024. Presentation materials are uploaded on our website for your reference. Thank you very much for joining the meeting. Thank you.